A certain firm originally had capital structure weights of 50% debt and 50% common equity.Since establishing those weights,the firm's stock price has risen dramatically.The firm has done no additional borrowing.Assume that nothing else in the economy has changed (e.g.,interest rates,tax rates,and other macroeconomic factors remain constant).Because the firm's stock price has increased a great deal,________.

Question

Quizplus · Accepted Answer

The firm's cost of equity has decreased because the stock price has increased. This is because the cost of equity is the required return on equity, which is the rate of return that investors require to invest in the firm's stock. The higher the stock price, the lower the required return on equity, because investors are willing to pay more for each share of stock.

A Certain Firm Originally Had Capital Structure Weights of 50